Understanding the Inpatient Prospective Payment System
The Inpatient Prospective Payment System (IPPS) is one of the many regulated payment schedules for clinicians, facilities, and suppliers that the Centers for Medicare & Medicaid Services (CMS) publishes annually to describe payment rates for caring for Medicare beneficiaries. The IPPS is focused particularly on inpatient care; payment for inpatient services is based on Diagnosis-Related Groups (DRGs) that categorize patients with similar conditions and treatment needs.
In addition to setting payment rates, the IPPS includes requirements for the hospital quality reporting program and any updates to the Conditions of Participation (CoPs) and Conditions for Coverage (CfCs), a requirement for healthcare organizations participating in the Medicare program.
In more recent years, the IPPS has begun to incorporate an increasing emphasis on value-based care in the form of bundled payment arrangements, where a hospital receives a single payment for a pre-defined episode of care. Under this single payment, the hospital must coordinate a patient’s pre- and post-acute care and inpatient services.
New for 2025
While the Fiscal Year (FY) 2025 IPPS is expansive, covering everything from Graduate Medical Education to new technology add-on payments, we will focus on some of the highlights of the rule finalized on August 1, 2024:
- Expanded classification of the severity designation for certain ICD-10-CM diagnosis codes for homelessness
- Changes to the Medicare Code Editor (MCE)
- Updates for the Hospital Inpatient Quality Reporting (IQR) Program and Medicare Promoting Interoperability Program
- New bundled payment model, Transforming Episode Accountability Model (TEAM)
- CoP requirements for hospitals and Critical Access Hospitals to report acute respiratory illnesses
Expanded classification
The IPPS MS-DRG classification system categorizes diagnosis codes based on whether a diagnosis, when present as a secondary condition, is considered a substantial complication or comorbidity. For FY 2024, CMS finalized changes based on the higher average resource costs of cases with ICD-10-CM Z diagnosis codes that indicated that the patient was experiencing sheltered or unsheltered homelessness. For FY 2025, CMS expanded this classification to include additional ICD-10-CM Z codes that describe inadequate housing or housing instability.
Medicare code editor
CMS has deactivated the sex conflict edit in the MCE effective October 1, 2024. The sex conflict edit was used to detect inconsistencies between a patient’s sex and any diagnosis or procedure on the patient’s record. IMO Health will continue to support these sex conflict edits on ICD-10-CM codes as we believe there is still value in retaining this content.
Updated quality reporting requirements
CMS added three new measures for the IQR program for FY 2025:
- The Patient Safety Structural Measure, a new multi-domain measure to assess whether hospitals demonstrate a structure, culture, and leadership commitment that prioritizes safety
- The Age Friendly Hospital Measure to assess hospital alignment with older patients’ goals and preferences
- The Thirty-day Risk-Standardized Death Rate Among Surgical Inpatients with Complications, which is a measure of death within 30 days after hospital acquired complication
New requirements for the Medicare Promoting Interoperability Program include separating the Antimicrobial Use and Resistance (AUR) Surveillance measure into two measures to clarify reporting requirements and incentivize greater data reporting. Both measures are reported to the Centers for Disease Control and Prevention (CDC) National Healthcare Safety Network (NHSN).
CMS also finalized an increase of the threshold from 60 points to 70 points for the electronic health record (EHR) reporting period in CY 2025 and from 70 points to 80 points for the EHR reporting period in CY 2026 and subsequent years.
Transforming Episode Accountability Model
The purpose of this model is to test whether an episode-based pricing methodology (bundled payment) linked with quality measure performance for select acute care hospitals reduces Medicare program expenditures while preserving or improving the quality of care for Medicare beneficiaries who initiate certain episode categories. The Transforming Episode Accountability Model (TEAM) is mandatory for selected acute care hospitals beginning on January 1, 2026 and applies to traditional Medicare beneficiaries, with Medicare as the primary payer.
Five surgical episode categories are included in TEAM:
- Lower extremity joint replacement (LEJR)
- Surgical hip/femur fracture treatment (SHFFT)
- Coronary artery bypass graft (CABG)
- Spinal fusion
- Major bowel procedure
CoP requirements for hospitals and CAHs to report acute respiratory illnesses
CMS finalized a new CoP for hospitals to maintain the level of public reporting for respiratory illness data that was adopted at the end of the Public Health Emergency and expired April 30, 2024. This CoP revises the hospital and CAH infection prevention and control and antibiotic stewardship programs to include a modified form of the current COVID-19 and influenza reporting requirements that will include data for Respiratory Syncytial Virus (RSV) for electronic reporting.
The FY 2025 IPPS builds on key agency priorities that include advancing health equity, improving the safety and quality of care, controlling program expenditures, and improving situational awareness around the impact of respiratory disease on the public.
